CEO's Report

CEO's Report

Oliver Yates

Progressive decarbonisation of the global economy remains firmly on the agenda and it is important this transition happens at the lowest cost possible.

CEFC CEO's Report - Oliver Yates

The significant contraction of investment in large-scale renewables was a disappointment for the sector this year, but the CEFC’s work continued.

We expanded our operations, working with new partners to create new financing options for borrowers for energy efficiency and renewable energy projects. Through a period of considerable uncertainty we continued to invest to provide confidence that we would support transactions.

We provided initial cornerstone commitments to new funds and products that support the sector and we managed existing investments as they moved into construction and operation, especially in regional areas.

The CEFC continued to work with other large project proponents across the country to ensure these ventures become investment- ready as the market changes.

In less than three full years of operation, the CEFC has made cumulative investment commitments of more than $1.4 billion, with a current portfolio of $1.2 billion of investment commitments at 30 June 2015.

These investment commitments contribute to projects and programs with a total value of around $3.5 billion.

These investments improve the competitiveness and efficiency of our economy and contribute towards reducing Australia’s greenhouse gas emissions while earning a return above the government cost of funds. Our portfolio of committed investments will, once operational, help contribute to Australia’s abatement task, while achieving a positive return for the CEFC.

During 2014–15, the CEFC made $484 million in new investment commitments to seven projects, with a further transaction closing just after the end of the financial year.

Reflecting the lack of utility-scale renewable energy projects in the market over the year, CEFC investments in 2014–15 were weighted more heavily towards energy efficiency projects and programs. These investments aim to accelerate the take up of energy efficient equipment, vehicles and renewable energy in Australia across all sectors.

Better buildings

About 20 per cent of Australia’s national greenhouse gas emissions come from buildings, and commercial buildings account for nearly half of these. More than 90 per cent of the emissions from commercial buildings comes from the consumption of grid-supplied electricity.

The CEFC has a focus on the property sector to widen efforts for efficiency upgrades to Australia’s building stock. The benefits of reduced energy use, operating costs and emissions are well documented, but barriers remain.

In 2014–15, the CEFC made a $125 million equity investment commitment to the EG Group’s High Income Sustainable Office Trust (HISOT). The Trust will invest in older office stock to upgrade their energy performance in order to revitalise and reposition them in the market. We selected EG Group as manager and established the HISOT with a mandate aligned with the CEFC Mission, as this is a more efficient way for the CEFC to mobilise funds than to individually assess each property.

This is our second investment into a fund structure, the first being our investment into the CFS Australian Clean Energy Infrastructure Fund. We expect to use this approach more in the future, to leverage funds and accelerate investment across other sectors and opportunities.

Cleaner energy

Over the year, uncertainty regarding the Renewable Energy Target essentially halted investment in new utility-scale renewable energy projects in Australia. Nonetheless, the CEFC was able to assist some renewable energy projects to overcome financing challenges by demonstrating the significant potential for off-grid renewables in regional and remote Australia.

Our $4.7 million investment in Epuron will enable the installation of 1.8MW of solar PV across five sites at the award-winning Ayers Rock Resort in the Northern Territory. This transaction was concluded as a limited recourse project financing. Small projects have challenges securing limited recourse project financing. The CEFC’s finance for this project shows that it can be done and will hopefully encourage further private sector investment in other small renewable energy projects.

Just after the end of the financial year, we announced an additional project commitment of $15 million to install 10.6MW of solar PV and 6MW of battery storage at the Sandfire Resources’ DeGrussa copper mine in remote Western Australia. The Sandfire DeGrussa project is a unique combination of an off-grid high capacity solar power array which will be fully integrated with an existing diesel-fired power station. Once constructed, this innovative project will provide approximately 40 per cent of the copper mine’s daytime electricity requirements and offset almost five million litres of diesel fuel – reducing the mine’s exposure to oil price volatility. This project will abate more than 12,000 tonnes of CO2-e annually.

Financing projects that may be considered too small or technologically risky for private sector lenders alone allows the CEFC to fill market gaps and catalyse investment and innovation that may not otherwise occur. These projects will help the Ayers Rock Resort and Sandfire Resources benefit from clean energy technologies, supporting the competitiveness of two businesses involved in tourism and mining, which are both important export industries for Australia.

Importantly, these two projects help build Australia’s technical experience in remote-area solar installation and maintenance. As an ‘open book’ investor, the CEFC shares its experiences to encourage other lenders to participate in similar transactions.

Just as wireless technologies and smart phones have changed our lives, economies and the infrastructure requirements for telecommunications, we can see the same transformation occurring for the generation, delivery and use of energy. Australia has the potential to become a world leader in this area.

Creating value from resources

Known fugitive methane emissions, including those from landfill sites and coal mines, make up around eight per cent of Australia’s total greenhouse gas emissions. The CEFC is providing finance for projects to capture this resource to produce electricity and reduce emissions, delivering both economic and environmental outcomes.

The CEFC’s 2014–15 investment in Landfill Gas Industries supports an Australian business focused on a specific opportunity to generate electricity from waste methane gas at landfill sites. This is our second investment in projects in this sector and we are working with other companies to make even more ambitious projects ‘investment ready’.

Landfill Gas Industries was also successful in the first auction under the Australian Government Emissions Reduction Fund (ERF). The income provided under the ERF to Landfill Gas Industries provides important collateral. In this way, future revenue derived under the ERF can be utilised by companies to borrow and make the necessary investments to undertake emission reduction projects. I would like to thank Ms Chloe Munro, Chair and CEO of the Clean Energy Regulator, and the CER team, for their willingness to make contractual changes to their own program, enabling ERF receivables to support financing structures.

Better businesses, equipment and vehicles

Australia’s energy productivity is lower than other G20 countries. Addressing this productivity gap is important to Australia’s economic growth and development. Research by ClimateWorks has shown that Australia has the potential to nearly double primary energy productivity by 2030.

Increasing energy productivity requires investment in energy efficient equipment and small-scale renewables. These investments often make economic sense but historically, a lack of finance has been a barrier to investment.

Working alongside other financiers, the CEFC is helping small businesses across Australia access an efficiency loan at reasonable rates and over a longer term, to finance their efficiency projects in ways which better meet their business needs. We are also helping products like ‘zero-dollar-down solar’ reach a wider market so that capital constrained businesses can realise these savings.

In 2014–15, we announced new programs with Firstmac, NAB and Origin, targeting an increased take up of small-scale renewables and energy efficiency. These programs have a particular focus on improving vehicle efficiency, lowering energy costs, improving the competitiveness of our agriculture sector and accelerating the take up of rooftop solar and battery storage.

Improving vehicle efficiency

The past year should be noted as the year clean transport became ‘cool’. Tesla launched its electric vehicle, the Tesla S, into the Australian market, and subsequently announced plans to roll out charging infrastructure at select locations across Brisbane, Sydney and Melbourne.

All the excitement aside, vehicle efficiency is an area in which Australia lags behind the world. This means the average emissions performance of our vehicles also lags behind the rest of the world. According to ClimateWorks, Australia’s current average CO2-e emissions per kilometre for vehicles is higher than the USA, Europe and China. According to the International Energy Agency, Australia’s average fuel economy is among the lowest in the world.

The CEFC is making finance available to accelerate the take up of low emissions, hybrid and electric vehicles. We know this transition will challenge refuelling infrastructure, be it for electricity or hydrogen, and we are exploring economic business models to facilitate this.

In the reporting year, we announced an asset finance agreement of $50 million between the CEFC and Firstmac, a leading Australian non-bank lender. This program will help accelerate business and personal adoption of low emissions and electric vehicles, as well as small-scale renewables and energy efficient equipment.

Improving the competitiveness of our agriculture sector

The CEFC also invested $120 million in the NAB Energy Efficient Bonus program. This program makes more capital available at better rates for businesses and organisations across Australia to invest in energy efficient equipment, vehicles, solar and storage. The program has a particular focus on agribusiness and regional Australia. The program uses a pre-approved list of equipment as the criteria for eligibility. This makes it easier for businesses and organisations to recognise energy efficient equipment, and for business bankers to promote the product.

Accelerating the take up of rooftop solar and becoming energy storage-ready

The expansion of small-scale renewables continues across Australia. Bloomberg New Energy Finance forecasts that across Australia, small-distributed capacity will reach nearly 5,000MW by the end of 2015.

Despite a decline in direct government support, the expansion of small-scale solar has been sustained. This is consistent with typical technological innovative take up curves as the price of the technology (in this case solar PV) falls. As an example, in 2010, just six per cent of households in South Australia had small-scale solar PV on their rooftops. By the end of 2015, this had increased to 34 per cent of households. Queensland and Western Australia aren’t far behind.

Despite impressive growth in small-scale solar, outcomes can be further improved. There are expanded opportunities with energy storage technologies entering the market. Zero-dollar-down systems and greater expansion of business take up of small-scale solar and battery storage is needed.

Our programs with Firstmac, NAB and Commonwealth Bank are encouraging the commercial and industrial sectors to realise their potential to benefit from solar.

The CEFC has also joined forces with Origin to further the deployment of solar energy in Australia, via a 12-year $100 million CEFC financing commitment. The CEFC finance will help support Origin’s offer of power purchase agreements (PPAs) to business and residential customers, helping customers access the benefits of solar and prepare for a distributed energy future. PPAs are an innovative way of driving further solar take up, by effectively allowing solar customers to purchase the energy generated from their panels, rather than having to purchase the panels themselves.

Helping to attract new capital for innovation

The CEFC is focused on facilitating increased flows of finance into clean energy in Australia.

We are often involved early with innovative companies to help them make their projects reality. Projects with a longer lead time may be less attractive to the commercial sector but have the potential to provide the innovation needed to transform our economy to be more competitive in a decarbonised future.

Smaller innovative and potentially high-growth companies face challenges raising funds in Australia’s thin venture capital markets. We are working to support innovative companies wherever possible, within the means currently available to us.

Over the year, two such innovative companies have been supported to succeed.

Sundrop Farms Pty Ltd secured growth capital for its expansion from global investment firm Kohlberg Kravis Roberts (KKR). The CEFC had been an early supporter of this innovative company, which plans to use solar thermal technology to desalinate seawater for irrigation, as well as heat and cool greenhouses to grow food in arid regions.

This combination of innovative clean energy technologies is a massive step towards sustainable food production. The project will construct the first commercial power tower in Australia with a mirrored heliostat to harness the power of the sun. In the words of Sundrop Farms CEO Philipp Saumweber: “Without the CEFC we would not have been in a position to negotiate funding with KKR.”

I offer my congratulations to Philipp and his team for their commitment in taking a vision and seeing it through to construction.

The CEFC is also supporting innovative Australian clean energy businesses like Energy Developments Limited (EDL). During the year, DUET Group made an acquisition offer for EDL. The CEFC has provided a debt facility to EDL and the takeover offer provides a good market validation of the EDL business model. EDL was also a successful bidder in the first auction for the Australian Government’s Emissions Reduction Fund.

Supporting individual clean energy businesses is important, but to have a broader economic impact, we also need to help capital markets grow to encourage more funding into the clean energy sector.

Helping capital markets expand for clean energy

With global agreement to limit the mean temperature rise to less than two degrees celsius, large capital investment is required. This will involve new products, investment vehicles and structures to allow for the mobilisation of institutional investment into clean energy and emissions reduction. Climate Bonds are part of this solution.

The CEFC committed to provide a cornerstone investment of up to $75 million in NAB’s $300 million Climate Bond issuance to demonstrate the potential in the Australian market for mobilising capital in renewable energy through green bonds.

This was the first Australian bank-issued climate bond and was also certified as being in compliance with international Climate Bonds Standards. A subsequent ANZ-issued green bond raised $600 million, and ultimately did not require the CEFC’s participation.

Climate (or green) bonds provide investors with the opportunity to invest in renewable energy and energy efficiency through a low risk, high quality fixed income product. At the same time, green bonds support long-term investment in important low carbon infrastructure projects, by providing longer tenor and secondary market liquidity.

The experience of the past year has shown that there is an emerging demand from investors for green bonds in Australia and we expect other banks and issuers to consider further issuances in the future.

Other approaches are being taken to help the development of institutional investment in clean energy, particularly to engage those large investors which generally invest indirectly through funds. We are supporting investment vehicles like EG Group’s HISOT property trust, as well as established a direct infrastructure investment platform with institutional investor, Colonial First State Global Asset Management’s (CFSGAM) CFS, called the Australian Clean Energy Infrastructure Fund.

Investment milestones

The CEFC is willing to invest early in a project’s lifespan, taking construction risk and supporting projects from design and development through to financing, construction and operation. A number of existing CEFC-financed projects and programs achieved significant milestones over the financial year.

Some businesses accessed our energy efficiency loan programs for the second time. This demonstrates that energy productivity upgrades occur over time as businesses have a capacity limit for upgrades. Perceived financial, operational and technological risk factors mean that energy productivity upgrades are likely to happen in stages.

The successful outcomes of these investments provide pathways for others to follow and CEFC finance is available to support their transformation.

Over the year, two CEFC loans with a combined value of nearly $10.6 million were repaid in full. For a lender, full repayment of capital is always welcome, even if it does reduce the portfolio.

These two loans, to Australian Paper ($9.9 million) and Lake Nathan Pty Ltd ($700,000), supported the installation of energy efficient equipment, supporting regional economic growth and employment in Victoria and Queensland. We are pleased these investments have proved mutually successful, leaving both businesses better positioned within their markets by reducing their energy costs and improving their green credentials.

A number of CEFC-financed projects also completed construction and began generating energy over the course of the year.

Carnegie Wave Energy, an Australian company that the CEFC has supported, successfully began exporting renewable energy to the grid using its innovative CETO wave energy technology. This demonstrated the world’s first commercial application of wave power for grid-connected electricity and demonstrates Australia’s potential to innovate and develop technologies for export to the world.

The Taralga Wind Farm began operating in the second half of 2015, with the project now fully operational. This project was built with BlueScope 100 per cent Australian-made steel towers, which were fabricated in Portland, Victoria by Keppel Prince Engineering.

Construction of the 56MW Moree Solar Farm in New South Wales is progressing successfully, employing up to 150 people and benefiting up to 40 local businesses. Developed by Spain’s Fotowatio Renewable Ventures (FRV), this project uses single-axis tracking technology to increase electricity production. Once complete, the Moree Solar Farm will be among Australia’s largest solar power stations. In addition, in Port Augusta work has begun on building Sundrop’s power tower and greenhouse.

The CEFC’s support at an early stage and our willingness to take some merchant risk is helping to grow the supply chain, bring down costs and increase the number of large-scale solar PV power stations in Australia. The Moree Solar Farm transaction was named IJ Global’s 2014 Asia Pacific Solar Transaction of the Year.

I acknowledge the Mayor of Moree Plains Shire Council, Katrina Humphries, who made bringing this project to the Moree community a focus of her attention. Local and regional communities stand to benefit from this energy transformation and communities can make a difference to a project proceeding successfully.

Appreciation

We are very fortunate in the wealth of experience and talent within our CEFC team, which has continued to strengthen through the maturing of the organisation and the breadth of the common experience gained through our work.

On behalf of all the staff of the CEFC, I express our great appreciation to our Chair, Jillian Broadbent AO. Jillian’s leadership of the Board, and the Board’s belief and steadfast vision of the long-term role of the CEFC, has maintained our momentum and kept us all on course, even when faced with headwinds. Board members give their time and insight generously, helping the organisation achieve its Mission and work towards the 2018 Portfolio Vision. Few organisations would ask as much of their Boards, given our monthly meetings, committees and regular calls.

I acknowledge the role of our then Responsible Ministers, the Hon. Joe Hockey MP and Senator the Hon Mathias Cormann for their engagement during this past year in the work of the CEFC. I would also like to acknowledge the work of their Departments with whom we work constructively.

Finally, I wish to acknowledge project sponsors and the businesses across Australia that show leadership by investing in renewable energy, energy efficiency and low emissions technology.

Many of the projects and programs we finance are the result of a team effort, involving co-financiers such as commercial banks and non-bank lenders, energy companies, renewable energy developers and our colleagues at ARENA. I extend my thanks to all the organisations we work with for their support and perseverance as we collectively grow the clean energy sector in Australia.

Looking to the future

The CEFC is a rapidly maturing organisation with deep expertise in clean energy finance and technology. In many respects our work is still in its early stages. Some projects can take several years to reach financial close, but each new project sets a precedent and provides learning from which others benefit.

As the market evolves and develops, our task is to position ourselves in a rapidly changing market, ensuring that we remain focused on facilitating increased investment into clean energy in Australia and are ready to accelerate our activities as energy policies evolve.

The CEFC was established to address financial barriers which inhibit Australia’s take up of clean energy technologies and improvements in energy productivity, both of which generate long-term economic benefits for Australia.

The CEFC’s role is to work with the private sector and contribute to achievement of Government policy objectives.

Our challenge, as always, is to efficiently deploy funds in line with our Mission and Mandate, while maintaining risk structures appropriate to a Government-owned organisation. Providing support through pragmatic and effective delivery of these outcomes at minimal cost remains our focus.

I have great faith in our team’s ability to continue to achieve this.

I also wish to acknowledge the CEFC’s other ‘green bank’ peers, with whom we co-operate and share knowledge. These include the UK Green Investment Bank, the Malaysian Green Technology Corporation, Masdar, the Japan Green Finance Organisation, the New York Green Investment Bank and the Connecticut Green Bank. These organisations have aligned objectives, investing to accelerate the roll out of new business models and clean energy technologies which can be transformative, while contributing to the achievement of emission reduction goals.

The CEFC is helping Australian businesses and the community transition to be economically, socially and environmentally prosperous in a low-carbon future.

The Clean Energy Finance Corporation (CEFC) invests commercially to increase the flow of funds into renewable energy, energy efficiency and low emissions technologies. The CEFC has supported projects across the Australian economy, benefitting a diverse range of businesses, large and small. The CEFC’s mission is to accelerate Australia's transformation towards a more competitive economy in a carbon constrained world, by acting as a catalyst to increase investment in emissions reduction. The CEFC does this through direct investments which attract private sector finance, as well as through its strategic co-financing partners. The CEFC was created by the Australian Government and operates under the Clean Energy Finance Corporation Act 2012. More information is available on the CEFC website: www.cleanenergyfinancecorp.com.au